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When renting a premises makes sense

There is a certain allure to owning your own business premises that tends to skew the decision of whether to buy or to rent in favour of ownership – security of tenure, the freedom to chop and change the structure, the growth of the value of the property, and, often, the stature that property ownership seems to add to business achievement.

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2017/05/30

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​But ownership of business premises is not always the better option. Depending on the circumstances of each business, renting can sometimes the wiser choice, says Stanton Naidoo, chief operational office for property management at Business Partners Limited (BUSINESS/PARTNERS).

As with most business decisions, it starts with comparing the costs. This seems simple enough, but make sure to add in all the costs of ownership - the monthly instalment of a bond, insurance, rates, maintenance and all other operational costs such as cleaning and security. All of these, compared to the monthly rent and tenant levies, provide the basic choice in its simplest form.

Affordability is key, yet it is often not a matter simply going for the cheapest option. Even if buying is more expensive than renting in the beginning, rental escalations tend to overtake bond repayments after a few years, making buying the cheaper options over the longer term.

On the other hand, even if bond repayments seem affordable, the cash needed for a deposit or renovation may be put to better use in the operations of the business, swinging the argument in favour of renting.

Naidoo points to many other conditions that favour renting over buying. In the early days of a business, it is certainly safer if the first move out of the entrepreneur's kitchen or garage is to a rented premises, rather than a bonded property. The chances of a start-up failing is unfortunately high and the consequences dire enough not to want to complicate it with the trauma of property repossession.

Even established businesses wanting to try out a new concept or branch often chose to rent the extra premises rather than buy until the concept proves viable.

Any fast-growing business, whether in its start-up phase or not, is often better off in rented premises because it is generally easier to move to new, bigger premises when the need arises. By signing a succession of short-term leases for increasingly bigger premises, a business can grow virtually unfettered by a lack of floor space.

On the other hand, many businesses are forced to put a brake on their growth when they run out of space in their own premises. Even though it is theoretically possible to rent or buy extra space, or to sell or rent out their premises in order to move to a bigger space, it is a slower and more difficult process which often impedes growth.

In contrast, with short-term rentals, the business has an opportunity to re-evaluate its position and decide whether to move every one, two or three years, depending on the length of the lease.

Owning your own premises is a long-term investment rooted to a single spot, and comes with a range of risks that tenants do not face. The risks of ownership include anything from the possibility of an expropriation claim that someone may have over the property, geological dangers such as earth movements, sink holes and floods, or social and political instability. A business renting in such an area can move to a better area relatively easily. A property owner, however, can lose millions. However most of these risks can be mitigated if you secure the support of an experienced financier such as BUSINESS/PARTNERS when buying your business premises.

What about the fear that a business may become beholden to the whims of a greedy landlord, who, knowing that a business would lose lots of customers if it had to move, pushes the rent sky-high when the lease comes up for renewal?

Much of this risk, says Naidoo, is mitigated by the delicate balance between the interests of the landlord and tenant. The tenant seeks security of tenure at a reasonable rental. The landlord, on the other hand, seeks steady rental income, uninterrupted by tenant churn and vacancies. Landlords are kept in check by their fear of vacancies in their buildings when they start pushing up rentals higher than the market rates for the area.

The choice between buying or renting is not always straight-forward, says Naidoo, and depends on the peculiarities of every case. The best decision can only be made when careful consideration is made.

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